Considering the severely precarious situation
Companhia Siderurgica Nacional
) faces, we currently downgrade our rating from Neutral to
Underperform. The downgrade reflects our concern about escalation
in cost of goods coupled with intermittent demands of steel from
the world market.
Since the third quarter of 2011, the company has been
experiencing pressurized gross margins stemming from surging cost
of goods sold, a phenomenon SID faced in its December quarter.
SID's cost of goods sold increased almost 32% annually which in
turn dipped the gross margin by 400 basis points. It is imperative
that management steers focus towards curtailing its investment
plans in order to keep a check on its ever-increasing debt
The Brazilian economy is heavily dependent on trades with the
U.S.; there is thus a lurking fear of exchange rate fluctuations
throughout the industries in Brazil which can incipiently
deteriorate big companies such SID's individual performances.
One of the biggest concerns about SID's stock is the volatile
nature of the industry it pertains to; rather easily affected by
fiscal downturns and change in trends of other industries such as
automotive, construction, distribution etc. Hence, SID remains
vulnerable to threats arising from these scenarios.
Also, SID has a few highly ominous competitors in the steel
industry of a fairly proactive stance. These include
Russel Metals, Inc.
L. B. Foster Co.
Grupo Simec S.A.B. de C.V.
). It would be wise to remain wary of progressive moves by such
players as the cross elasticity can adversely affect CSN's
However, there are a few aspects which are likely to ameliorate
growth for the company in the upcoming quarters. SID has been
making incipient advances to expand its core business segments,
primarily by investing in various iron ore mining, cement and
infrastructure projects. Its entire mining segment is expected to
have a production capacity of nearly 79 million tons of iron ore
per year by 2014.
In order to strengthen its mining sector, SID plans to invest
about $393 million at its Casa de Pedra and $135 million at its
Namisa mine in 2012. Even though margins are performing quite
detrimentally, it is important that the company cautiously makes
these advances in order to increase sales volumes and expand market
share in the economy.
There has been a growth trend in Steel demand in the world
currently. SID appears to be in a favorable position in this regard
as steel demand is expected to catch pace as Brazil plays host to
the 2014 Soccer World Cup and 2016 Olympic games.
SID recently acquired Stahlwerk Thuringen GmbH (SWT) from the
Alfonso Gallardo Group for about $644 million which currently has a
steel production capacity of 1.1 million tons. Management's intent
to accrue gains from making such strategic and profitable
acquisitions might prove to be an important growth driver in the
Even though a few upsides prevail, we consider it wise to
maintain a sideline stance for now owing to the tremendously
precarious conditions clouding the company's growth lines for the
coming time. However, the company currently retains a Zacks #5
Rank, which translates into a short-term Strong Sell rating.
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